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Plaintiffs Theodore H. D. Jones, Jeanie Kayser-Jones, and Robert Frost are informed and
believe and thereupon allege in support of their claims against Defendant Armanino LLP
(formerly known as Armanino McKenna, LLP) (“Armanino”) as follows:
I. INTRODUCTION
1. This is a class action brought by Plaintiffs individually and on behalf of all
those similarly situated investors who have suffered damages as a direct result of the
misconduct of Armanino — California’s largest accounting firm.
2. From 2003 until it resigned in 2011, Armanino served as outside auditor for
R.E. Loans, LLC (“RE Loans” or “the Fund”), a California-based hard moneylender that
pooled funds raised from investors to make real estate development loans. Investors in RE
Loans became members ("Members") of the Fund in return for their investments.
3. Beginning at the latest during its audit report for 2005, Armanino was aware
that its audit client RE Loans had sold its investors securities in violation of federal and state
securities laws. Armanino accordingly knew that RE Loans had a fiduciary duty to disclose its
misconduct to its investors, as well as a legal duty to offer those investors rescission and to
cease raising new funds from investors. Nevertheless, Armanino knowingly and actively
assisted the ongoing breaches of fiduciary duties, securities law violations and other unlawful
conduct by RE Loans and its managers of RE Loans (the “Managers”), by supplying them
with “clean” audit reports concealing the illegal activity – reports that RE Loans needed (a) to
continue raising funds from unwitting investors and (b) to submit to its regulators to continue
the false appearance of the lawful operation of RE Loans.
4. Armanino thus helped RE Loans and the Managers conceal from investors and
regulators that they had raised and were raising money from the Members illegally. In
particular, Armanino’s 2005, 2006 and 2007 “clean” audit reports included financial
statements that failed to disclose hundreds of millions of dollars in reasonably possible
contingent liabilities associated with potential criminal, regulatory and civil litigation
associated with RE Loans’ unlawful conduct.
5. In the course of auditing RE Loans financial results for fiscal years 2003, 2004,
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2005, 2006 and 2007, Armanino had become intimately familiar with the Fund’s business
model, its structure, its loans and its risk exposure to real estate and mortgage backed assets.
Armanino was aware that its audit opinions (sometimes also referred to generically as
“reports”) and the RE Loans financial statements that Armanino prepared would be used and
relied upon by prospective and existing investor Members to make investment decisions
regarding their RE Loans securities and in their capacity as members of RE Loans. Offering
Circulars used by RE Loans to solicit investment funds from the Members contained
numerous representations that the Fund’s annual financial statements would be audited by an
independent auditor and made available to the Members in connection with annual reports and
as part of the Fund’s business records.
6. Armanino furthermore knew that an essential purpose of its audits was to have
the firm act as a reputational intermediary who would use its unique access to RE Loans'
underlying non-public information used to prepare its financial statements to ostensibly
provide “independent” assurances of financial integrity, reliability and stability to RE Loans’
investors and securities holders. Armanino knowingly violated the important, trusted, critical
role of a truly independent auditor (which, as shown below, it was not), by electing instead to
afford its client “flexibility” with respect to its audit work – a “wink and a nod” approach to
auditing that Armanino touted in its marketing materials in its quest to garner more business in
a highly competitive marketplace.
7. Having conducted significant accounting and audit work for RE Loans since
2003, Armanino was aware that RE Loans raised capital principally through investor
contributions. But although the Membership interests constituted “securities,” RE Loans’
offerings were not registered with the Securities and Exchange Commission (“SEC”). Instead,
RE Loans Membership interests were represented and sold as unregistered offerings,
purportedly under California Corporations Code section 25113(b)(1) and certain SEC
exemptions that restricted the Company’s business to qualified California residents. However,
RE Loans operated in flagrant violation of those exemptions, by among other things: (i)
actively soliciting and selling to investors residing outside of California; (ii) loaning money on
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properties located outside of California (including Texas, Florida, Wyoming, Washington,
South Carolina, and Nevada); (iii) selling membership interests to more than 500 investors;
and (iv) accumulating more than $10 million in total assets.
8. Armanino knew that, at a minimum, it was reasonably possible that the
securities violations created enormous contingent liabilities for RE Loans to the Members. Yet
Armanino did not disclose the ongoing securities violations in its audit report for 2005, and
instead compounded its misconduct by including misleading half-truths about the securities
violations in its audit report for 2006.
9. Because Armanino unquestionably knew (a) that RE Loans was selling
unregistered securities in violation of the law, and (b) that RE loans could not survive without
securing capital infusions through additional investor contributions while avoiding regulator
scrutiny, it furthermore knew that continuation of the scheme required the continued issuance
of “clean” audit opinions. Armanino also knew that RE Loans Managers not only failed to
disclose the securities violations to new and existing Members, but also falsely represented to
investors and regulators that RE Loans was operating in compliance with the operative
securities registration laws. Armanino knew these facts because the Offering Circulars used
by the Managers failed to disclose RE Loans’ prior and ongoing securities violations, instead
falsely representing that the Membership interests were subject to valid exemptions from
registration. By continuing to issue audit reports used by RE Loans to raise investor capital
and to ostensibly comply with regulatory requirements, Armanino knowingly and recklessly
assisted the RE Loans Managers’ breaches of their fiduciary duties to the Members.
10. At least as early as the issuance of its March 16, 2007 “clean” audit opinion
respecting RE Loans 2006 fiscal year financial statements, and continuing thereafter, through
its issuance of yet another “clean” audit opinion on April 11, 2008, Armanino knew that RE
Loans' 2006 and 2007 financial statements and accounting violated Generally Accepted
Accounting Principles (“GAAP”).
11. Armanino was furthermore well aware at all times material of the particular and
peculiar audit risks associated with RE Loans' real estate related assets. Armanino knew and
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unquestionably foresaw that no reasonable investor would willingly invest or keep their
money in a company or fund with the serious problems that RE Loans was experiencing if the
truth about its unlawful conduct and financial condition were told. Yet, despite its ultimate
knowledge (and willful disregard of facts to the contrary), Armanino issued "clean" audit
reports for RE Loans' fiscal years 2006 and 2007, falsely representing that:
Armanino had conducted its audits in accordance with Generally
Accepted Accounting Standards (“GAAS”), and
RE Loans’ financial statements fairly presented, in all material respects,
its financial position for fiscal years 2006, and 2007, in conformity with
GAAP.
These representations were false, deceptive and misleading, and Armanino knew it. Armanino
issued its “clean” audit opinions knowing and/or intending that RE Loans' investors would
rely on Armanino's imprimatur as expressed in those audit opinions when they made their
investment decisions, and that its audit opinions would, among other things, influence
investment decisions by new and existing RE Loans Members.
12. As anticipated, the “clean” audit reports issued by Armanino helped RE Loans
raise money through its continued unregistered securities offerings to Plaintiffs and the other
investors in the proposed Class, and importantly, reassured Members that RE Loans was in
sound financial condition while operating in conformity with the law, so that they would
invest in and/or continue to hold their investment interest in RE Loans’ securities. With the
active assistance of Armanino, RE Loans illegally raised another $500 million from its
Members through the unlawful securities sales during 2005 and thereafter. Armanino knew
that its "clean" audit opinions would be and that they were included with RE Loans’
Offering Circulars and Offering Prospectus materials disseminated to investors and Members.
Plaintiffs is informed and believes and thereupon alleges that Armanino consented to its audit
opinions inclusion and use with respect to such RE Loans’ communications.
13. As a consequence of Armanino's rendering such “clean” or "unqualified" audit
opinions, instead of "qualified" or "adverse" audit opinions, including an exception signaling
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grave doubt that RE Loans could continue as a "going concern," that Armanino should have
rendered, Plaintiffs and the other Class Members (a) were duped into investing in RE Loans
and (b) were, through the RE Loans Exchange Offering commencing November 2007, duped
into agreeing to exchange their Membership interests for promissory notes that purportedly
relieved the Managers of their fiduciary duties to RE Loans' investors and stripped the
investors of their control rights with respect to RE Loans. In particular, Armanino's “clean”
audit opinion rendered March 16, 2007 regarding RE Loans’ financial statements for fiscal
year 2006 was incorporated into RE Loans’ November 2007 Exchange Offering circular and
materials even as Armanino was conducting RE Loans’ audit of its 2007 fiscal year financials.
Then, continuing the deception, Armanino issued yet another “clean” audit opinion on April
11, 2008 as to RE Loans’ 2007 fiscal year financial statements, providing additional
concealment of RE Loans financial fraud, and thus deceiving unwitting Class Members to
acquire new securities — now debt securities — to their detriment and harm.
14. Armanino's audit work was an extreme departure from GAAS, flagrantly
ignoring numerous red flags and violations of GAAP, as more fully discussed below. Its
“clean” audit opinions respecting RE Loans’ fiscal year 2006 and 2007 financial statements
camouflaged and concealed the truth about RE Loans' true financial condition, status and
misconduct.
15. Members who invested in RE Loans in reliance upon Armanino's false and
deceptive audit opinions, or otherwise agreed to exchange their Membership interests for
promissory note debt securities, have suffered great harm and damages exceeding $600
million. Many invested all or virtually all of their life savings in RE Loans, and many others
who even have been rendered destitute as a consequence. Armanino, on the other hand,
profited handsomely by providing the “clean” audit reports essential to the Managers’ scheme.
II. JURISDICTION
A. Jurisdiction
16. Jurisdiction is proper in this Superior Court under California Code of Civil
Procedure (“C.C.P.”) § 410.10 and the California Constitution, Article VI §10. This Court,
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and not the United States District Court, has jurisdiction of this class action because Plaintiffs’
claims fall within the provisions of 29 U.S.C. § 1332(d)(4)(A) (a subdivision of the Class
Action Fairness Act) for the following reasons:
• more than two-thirds of the members of the proposed classes are citizens
of the State of California;
• Armanino is a defendant (i) from whom significant relief is sought by
members of the proposed classes, (ii) whose alleged conduct forms a
significant basis for the claims asserted by the proposed classes, and (iii)
is a citizen of the State of California;
• the principal injuries resulting from the alleged conduct or any related
conduct of alleged herein were incurred in the State of California; and
• during the 3-year period preceding the filing of this class action, no other
class actions has been filed asserting the same or similar factual
allegations against Armanino on behalf of the same or other person.
17. This Court also has jurisdiction of this class action under 29 U.S.C. §
1332(d)(4)(B) because two-thirds or more of the members of all proposed plaintiff classes in
the aggregate, and a primary (indeed, sole) defendant, Armanino, is a citizen of the State of
California.
18. The Securities Litigation Uniform Standards Act of 2001 (“SLUSA”),15 U.S.C.
§§77p, 77v, 77z-1, 78-4 and 78bb (2000), does not apply to mandate the bringing of this Class
Action in federal court because:
• The securities or promissory notes that are the subject matter of this
action are not “covered” securities as defined by sections 18(b)(1) and
18(b)(2) of the Securities Act of 1933.
• The securities or promissory notes that are subject matter of this action
are not listed, or authorized for listing, on the New York Stock Exchange
or the American Stock Exchange, or listed, or authorized for listing, on
the National Market System of the Nasdaq Stock Market (or any
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successor to such entities).
• The securities or promissory notes that are the subject matter of this
action are not listed, or authorized for listing, on a national securities
exchange (or tier or segment thereof) that has listing standards that the
Commission determines by rule (on its own initiative or on the basis of a
petition) are substantially similar to the listing standards of the New
York Stock Exchange, American Stock Exchange or NASDAQ (or any
successor entity).
• The securities or promissory notes that are the subject matter of this
action were not issued by an investment company that is registered, or
that filed a registration statement, under the Investment Company Act of
1840.
• Plaintiffs’ claims asserted herein are made individually and on behalf of
purchasers and holders of the promissory notes/securities from their
issuers.
19. Venue is proper in the County of Alameda pursuant to C.C.P. §§ 395, 395.2,
and 395.5: Armanino does business within the State of California and within Alameda
County. The acts and practices alleged herein occurred, in part, in Alameda County and the
harms alleged herein occurred, in part in Alameda County.
B. Nature of Claims
20. Plaintiffs seek to recover direct claims for monetary and statutory damages that
belong to Plaintiffs and the Class respecting their investments in RE Loans. These claims are
not asserted against any entity that has filed a pending action in federal court seeking
protection under or pursuant to the bankruptcy laws or statutes of the United States. These
claims are not derivative in nature and are not asserted against assets of a bankrupt debtor.
21. Plaintiffs seek to recover for injuries arising from the false and misleading
financial statements and audit reports for RE Loans issued by Armanino for fiscal years 2005,
2006 and 2007. Plaintiffs expressly disclaim any intention to pursue derivative claims based
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on mismanagement or misappropriation by the Managers.
III. PARTIES
A. Plaintiffs
22. Plaintiffs are residents and citizens of California, and RE Loans Members.
Plaintiffs Theodore H.D. Jones and Jeanie Kayser-Jones are residents of San Francisco County
and Plaintiff Robert Frost is a resident of Alameda County.
23. RE Loans provided Plaintiffs with various documents, including annual reports
containing its audited financial statements and the "clean" audit opinions issued by Armanino,
as discussed more fully herein, which Plaintiffs relied upon in deciding to purchase RE Loans'
securities.
24. In November 2007, Plaintiffs received RE Loans’ written Exchange Offering
materials. The “clean” audit opinions rendered by Armanino and RE Loans' unaudited
8/31/07 Financial Statements were included in the Exchange Offering materials. Plaintiffs
decided to vote to approve the Exchange Agreement, as a consequence of which their equity
Members security was exchanged for an RE Loans' debt security — promissory notes —
having represented values equal to the face amount of the notes.
25. In late 2007, Plaintiffs received “Secured Promissory Notes” from the RE Loans
Managers in exchange for their membership interest, which had increased in value since their
initial investments due to the reinvestment of interest. At that time, the value of Plaintiffs
Jones’ account exceeded $2,836,000 and the value of Plaintiff Frost’s account exceeded
$286,000. To date, RE Loans has not made any payments on Plaintiffs’ promissory notes.
26. Had Armanino not rendered false, deceptive and misleading "clean" audit
opinions as more fully discussed below, Plaintiffs would not have invested with RE Loans,
would not have accepted the Exchange Offering securities and would have otherwise taken
steps to protect their investment and position.
27. As a direct result of Armanino's conduct alleged herein, Plaintiffs have been
damaged in an amount to be proven at trial.
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B. Defendant
28. Defendant Armanino LLP, formerly known until January 2013 as Armanino
McKenna LLP, is a limited liability partnership organized and existing under the laws of the
State of California, with its principal office located in San Ramon, California. Armanino,
which regularly does business within California, is the 35th largest accounting firm in the
United States when measured by revenue. Employing more than 300 professionals, Armanino
is the largest accounting, audit and business-consulting firm headquartered in California.
29. Armanino promotes itself to the public as possessing “extensive on-site partner”
involvement with management utilizing “experienced staff at all levels,” with its “partners and
managers” taking a “hands-on approach to auditing,” and conducting “much of their review
on-site.” In its aggressive effort to secure or maintain clients in a competitive market,
Armanino promises to “strive to be flexible” — boasting to clients that “we understand your
SEC audit and compliance needs.” Armanino also holds itself out to the public as possessing
“knowledge in our client’s industries” — which include areas relevant to RE Loans such as
“private equity,” “real estate,” “limited partnerships” and “mortgage pool” investments.
Armanino’s audit staff possess training and experience in such areas as loan loss reserves
analysis, loan refinancing versus restructuring, accounting for real estate owned, held for sale
and held for use, sales of real estate and a myriad of fair value issues facing mortgage
investments. Armanino further advertises that "having financials audited or reviewed by a
quality firm is helpful in maintaining confidence of investors." By its own account Armanino
was thus no novice with respect to RE Loans' industry-specific business and audit issues, and
knew full well, at all times material, that its audit opinion(s) respecting the Fund’s financial
statements held high importance to and would be relied upon by investors with respect to their
decisions to purchase, hold or divest themselves of its client’s securities or offerings.
30. At all relevant times from 2002 until January 14, 2011, Armanino served as an
Independent Registered Public Accounting firm for RE Loans. Armanino audited RE Loans’
financial statements for a number of years including, relevant to the claims herein, RE Loans’
2005, 2006 and 2007 fiscal years.
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31. RE Loans’ 2005 financial statements – for which Armanino issued a “clean”
audit opinion on February 17, 2006 – was provided or made available to RE Loans' Members
by the RE Loans' Managers. RE Loans 2006 and 2007 financial statements – for which
Armanino issued “clean” audit opinions of March 16, 2007 and April 11, 2008, respectively –
were likewise provided or made available to RE Loans' Members by the RE Loans Managers.
In particular, Armanino's "clean" audit opinion of March 16, 2007 respecting RE Loans’ fiscal
2006 financial statements was included in an RE Loans’ Exchange Offering circular and
materials disseminated to its Members commencing in November 2007, and used therein for
the purpose of inducing Class Members to agree to RE Loans’ proposed securities exchange
transaction whereby Plaintiffs and Class Members unwittingly exchanged their membership
interests in RE Loans for promissory notes, much to their substantial detriment and harm.
Armanino then audited RE Loans' financial results for 2007 and issued yet another “clean”
audit opinion on April 11, 2008, that was read and relied upon by Plaintiff sand Class
Members in making their investment decisions to hold RE Loans' securities to their detriment,
as more fully discussed below.
32. In addition, Plaintiffs are informed and believes, and thereupon alleges, that
Armanino stepped outside its role as independent auditor and assisted in the preparation of the
very RE Loans’ financial statements it was auditing – essentially auditing its own work –
thereby violating its overarching duty of strict independence.
33. Armanino knew that its “clean” audit opinions and the financial statements it
helped prepare (a) were being relied upon by RE Loans' investors and Members to make
investment decisions, and (b) were being submitted by RE Loans to its regulators as evidence
of continued lawful operations.
IV. SUBSTANTIVE ALLEGATIONS RESPECTING ARMANINO’S FALSE AND DECEPTIVE AUDIT OPINIONS
A. RE Loans’ Formation and Growth from 2002-2006
34. RE Loans was formed in 2002 as a hard-money lender that used funds obtained
from investors to make real estate development loans, ostensibly returning profits from these
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loans to those investors who became Members of the Fund in return for their investments.
35. After its formation, RE Loans was managed at all times material by four
individuals: Bruce Horwitz, Walter Ng, Barney Ng, and Kelly Ng. Bruce Horwitz and Walter
Ng, along with Walter Ng’s sons, Barney and Kelly Ng, managed RE Loans through their alter
ego company, B-4 Partners. Barney and Kelly Ng also operated RE Loans through another
alter-ego company called Bar-K. Barney Ng served as Bar-K’s President and Kelly Ng served
as Bar-K’s Vice-President. On or about November 2007 and pursuant to a November 2007
Exchange Offering and consequent Exchange Agreement (the “Exchange Agreement”), more
fully discussed infra, Bar-K became a Manager of RE Loans.
36. RE Loans raised the money to fund its developer loans by selling unregistered
securities to Plaintiffs and thousands of other private investors in California and other states.
Investors became Members of RE Loans by purchasing shares costing $1.00 apiece, with a
minimum subscription of 20,000 shares ($20,000). The Managers’ message to potential
investors was twofold: (1) an investment with RE Loans was safe and profitable; and (2)
Members had access to their money and could withdraw some or all of their investment.
37. Managers often solicited investors to invest monies with RE Loans who were
retired or approaching retirement. Many Members purchased their interests using all of their
retirement funds, while many others invested their entire life savings. And many were
convinced to mortgage their homes and invest the loan proceeds in RE Loans.
38. From the beginning, RE Loans promised to pay the Members periodic interest
payments on their investments — monthly, quarterly, or semi-annually. The governing
operating agreement did not provide a clear method or protocol explaining how these
promised periodic interest payments would be determined. RE Loans’ website assured
investors that their investment was liquid, representing that “After your account is open, funds
may be added or withdrawn at any time.” The website also stated: “A fixed regular amount
can be scheduled and sent to you on a monthly, quarterly, semi-annual or annual basis. If you
need a check during the month, one will be cut and mailed on the Thursday following your
request.”
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39. The ability of RE Loans Members to withdraw some or all of their capital was a
major feature and selling point. Through Fund updates, RE Loans repeatedly assured Members
that “[y]ou may add to or withdraw from your account at any time.” They told Members:
“Currently, we offer an option to make scheduled withdrawals monthly, quarterly, semi-
annually, or yearly, or you may make an unscheduled withdrawal at any time.”
40. Under the governing operating agreement, RE Loans Members had certain
control rights. For instance, Members holding a majority of interest (more than 50% of all RE
Loans shares) could remove the Managers and designate a replacement. A majority interest of
Members could vote to dissolve RE Loans, or (with limited exceptions) amend the operating
agreement. Members were also entitled to withdraw all or a portion of their investment, upon
written notice to the Managers.
41. RE Loans grew rapidly since its inception and secured a multitude of investors
from 2002 through 2006. By early 2007, the Managers had raised more than $700 million
from approximately 1,400 Members.
B. RE Loans’ Rampant Undisclosed Securities Violations
42. However, unbeknownst to investors, RE Loans’ growth and prosperity was the
product of illegal conduct that threatened its very existence. From 2002 through 2007, the
Managers running RE Loans had violated state and federal securities laws in the sales of RE
Loans' Memberships. Although the Membership interests constituted securities, the offerings
were not registered with the Securities and Exchange Commission (“SEC”). Instead, RE
Loans Membership interests were sold as unregistered offerings under California Corporations
Code § 25113(b)(1) and certain SEC exemptions that restricted the Company’s business to
qualified California residents.
43. But the purported exemptions were not applicable because RE Loans was
violating the operative securities regulatory requirements in four ways: (i) by actively
soliciting and selling to investors residing outside of California; (ii) by lending money on
properties located outside of California (including Texas, Florida, Wyoming, Washington,
South Carolina, and Nevada); (iii) by selling membership interests to more than 800 investors;
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and (iv) because RE Loans had more than $10 million in total assets. These violations not
only gave the Members the right to rescind, they precluded RE Loans from raising new funds
without disclosing the violations.
44. Armanino knew that RE Loans had been illegally selling securities for many
years in violation of the California and federal securities laws. Armanino knew that, contrary
to its representations in the Offering Circulars used to induce investments by the Members, RE
Loans had been actively soliciting investors residing outside of California, that a substantial
and increasing portion of its loans to developer borrowers were secured by properties located
outside of California and that RE Loans had far more than $10 million in reported assets.
Armanino also knew that RE Loans had far more than 500 investors.
45. The RE Loans Offering Circulars expressly represented that “[u]nder California
law, the fiduciary duties of a manager to … its members are those of a partner to …the
partners of a partnership.” The Offering Circulars also represented that the Managers’
fiduciary duties included the obligation “to exercise good faith and integrity with respect to
company affairs.” Thus, Armanino knew that the RE Loans Managers owed fiduciary duties
to the Members.
46. Armanino also knew that the RE Loans Managers had not disclosed to the
Members that the Fund was selling securities in violation of the securities laws and that the
Offering Circulars used by RE Loans to solicit investment capital from the Members were
materially false and misleading. The Offering Circulars provided to Members failed to
disclose the securities registration violations and falsely represented that: (a) RE Loans was
operating in compliance with applicable laws, including the securities registration
requirements (falsely stating that the membership interests were exempt from registration; (b)
loans to related parties would not exceed 15% of the total Fund assets; and (c) RE Loans
would originate or invest in loans secured by properties located primarily in California.
Armanino knew that the RE Loans Managers were violating their fiduciary duties to the
Members by making false and misleading statements in the Offering Circulars and failing to
disclose material facts to the Members in the Fund’s financial statements.
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47. At the time it rendered its audit opinions for 2006, Armanino was aware of the
fact that RE Loans was continuing to sell unregistered securities, thus creating the reasonable
possibility for massive claims by the RE Loans Members and a resulting need for the
disclosure of a significant contingent loss that would render RE Loans balance sheet insolvent,
along with the issuance of a “going concern” exception. But rather than ensure that the known
securities violations, or the resulting reasonably possible contingent liabilities to the Members,
were disclosed in RE Loans’ audited financial statements, Armanino issued “clean” audit
reports for fiscal years 2005, 2006 and 2007 that said nothing about the known securities
violations. Armanino knew that its "clean" audit opinions would be and that they were
included with RE Loans’ Offering Circulars and Offering Prospectus materials disseminated
to investors and Members. Plaintiffs are informed and believe and thereupon allege that
Armanino consented to its audit opinions inclusion and use with respect to such RE Loans’
communications.
48. Despite its knowledge that the RE Loans Managers were violating their
fiduciary duties to the Members, illegally raising funds in violation of the securities laws and
soliciting investors with false and misleading Offering Circulars, Armanino continued to
substantially assist the securities violations and ongoing breaches of fiduciary duties by acting
as a reputational intermediary and issuing false and misleading audit reports that it knew
would be used for, and were essential to, continued sales of securities to new and existing
Members and to induce Members to continue holding securities rather than withdrawing their
monies from RE Loans. Armanino also knew that its audits were necessary for RE Loans to
obtain and renew permits and licenses from the California regulatory authorities and that the
RE Loans Managers would use the financial statements and audit reports of Armanino for that
purpose, again in violation of their fiduciary duties to the Members.
C. RE Loans’ Rapidly Deteriorating Financial Condition
49. Beyond and compounding this illegal activity was the dilemma that in 2006,
and increasingly thereafter, RE Loans was experiencing liquidity problems amid artificially
and deceptively improving its financial reports, camouflaging its deteriorating financial
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condition. This adverse progression toward insolvency was gravely exacerbated in 2007,
when — as a result of RE Loans’ violations of securities laws — its Managers were compelled
to cease collecting or accepting any future investor contributions, thus turning off a spigot of
cash needed to stay afloat.
50. In 2007, RE Loans was accelerating toward insolvency. Not only could RE
Loans not meet its portfolio loan commitments, it lacked the liquidity to pay capital
withdrawals requested by the Members. The Managers simply had no way to legally raise
operating cash through infusions of additional membership capital to restore the Fund’s
liquidity, a fact that was well-known to Armanino at all times material. Indeed, RE Loans
could not accept new investment capital – thus creating the additional impediment of not being
able to fund its obligations to borrowers or pay distributions to the investors who had been
promised that they could withdraw their funds at any time.
D. RE Loans’ Fraudulent “Exchange Transaction”
51. Commencing November 2007, RE Loans engaged in an offering (“Exchange
Offering”) of its securities seeking the agreement of its Members to exchange their equity
membership interests in RE Loans for promissory notes — debt securities issued by RE Loans
(“Exchange Transaction”).
52. RE Loans Managers, with co-schemers Greenberg Traurig and Wells Fargo,
conceived and developed the planned Exchange Offering to continue to keep RE Loans afloat
while concealing its true financial condition and illegal acts from the unsuspecting Members.
53. Armanino's false and misleading March 16, 2007 "clean" audit opinion was
incorporated with the Exchange Offering circular and materials to continue to keep unwitting
investors in the dark in the hope that RE Loans' Members would approve the Exchange
Transaction — which they did.
54. As a result of the Exchange Offering, RE Loans Members were duped into
agreeing to transform their interest as Members in RE Loans into creditors with debt-security
interests: promissory notes with represented values equal to their represented account values.
Although the RE Loans Managers represented to the investors that RE Loans would be able to
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pay its obligations under the new promissory notes, the Managers and Armanino knew that the
Fund could not and would not be able to pay those obligations due to its undisclosed liquidity
crisis and ultimate insolvency.
55. As a result of its prior securities violations, RE Loans was never able to raise
new investor capital to meet its ongoing obligations to borrowers, Wells Fargo and, most
importantly, to the investor noteholders. To keep the RE Loans’ house of cards standing, the
Managers and Greenberg formed a new investment company – Mortgage Fund ’08, LLC
(“MF08”) - to solicit funds from investors and funnel those funds to RE Loans. This was in
essence a Ponzi scheme arrangement that enabled the Managers to give RE Loans the false
appearance of financial stability.
E. RE Loans’ Financial Statements Are False and Misleading
56. Disclosure in any way of the foregoing information acutely material to RE
Loans Members – i.e., RE Loans’ securities violations, GAAP violations and especially a
“going concern” exception – would undoubtedly have lead to a “run on the bank” by informed
Members. RE Loans’ Managers needed a "flexible" auditing approach to its financial
statements, especially for its fiscal years commencing 2006 and thereafter, failing which
investors and Members would demand the immediate return of their investments and flee. To
that end, the Managers turned to Armanino to secure a "clean" audit opinion with regard to RE
Loans’ financial statements under the guise of an "independent” audit that would further
comfort, lull and deceive investors and Members into investing new funds with RE Loans and
stave off any demands for withdrawal or action by Members to protect their investments.
F. Armanino’s Audits Were Essential to RE Loans Ability to Solicit and
Retain Investment Capital and Secure Membership Agreement to the
Exchange Transaction
57. For many years, Armanino served a RE Loans’ outside auditor. Because of its
long history with RE Loans and expertise in real estate lending related clients, Armanino was
intimately familiar with its business model, structure, employees, loan portfolio and exposure
to real estate and mortgage backed assets.
58. Using Armanino as its ostensible “independent” auditor gave the desired
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credibility to RE Loans’ presentation of its financial condition to investors, given Armanino’s
status as the largest auditing and consulting firm in California. In addition, the credibility and
reliability of a company’s financial statements when audited by an “independent” audit firm
rendering an unqualified or “clean” audit opinion is reinforced or strengthened by (a) the
purported adherence by that audit firm to the GAAS standards adopted and respected by the
industry to ensure that GAAP have been complied with by reporting firms and (b) the
purported independent and reliable assessment has been made as to whether that company can
or will exist as a “going concern.”
59. Given this obligation to follow GAAS, investors are comforted by an ostensibly
independent auditors’ assurances that financial statements comply with GAAP and fairly state
the financial condition of a company, and by the absence of qualifications or adverse
exceptions — such as a “going concern” exception — issued by that audit firm. Armanino
and RE Loans Managers knew the value of such a “clean” audit opinion and its inevitable
impact on investors.
1. GAAP — Generally Accepted Accounting Principles
60. By way of background, financial statements are a central feature of financial
reporting and are a principal means of communicating accounting information to parties
external to an entity, such as investors. (Statement of Financial Accounting Concepts
(“FASCON”) No. 1, Objectives of Financial Reporting by Business Enterprises (“FASCON
1”), ¶ 6). An important barometer of the reliability and integrity of a company’s financial
statements and reporting is the “Auditors Opinion”: a certification that accompanies financial
statements and is provided by the independent accountants who audit a company’s books and
records. When an audit is performed, it is the financial auditor’s job to make sure that records
are examined in an honest and forthright manner. Independent auditors are often used – or
even mandated – to protect shareholders and potential investors from fraudulent or
unrepresentative financial statements made or issued by companies. The auditor’s opinion
defines the scope of the audit, the accountant’s opinion of the procedures and records used to
produce the statements, and the accountant’s opinion of whether or not the financial
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statements present an accurate picture of the company’s financial condition.
61. There are generally three types of auditors’ opinions. A “clean” or unqualified
opinion states that the financial statements present a fair and accurate picture of the company
and comply with GAAP. A “qualified” opinion contains exceptions, which may include the
scope of the audit. An “adverse” opinion contains a major exception or warning. The most
well-known adverse opinion is the “going-concern” exception or warning, in which the auditor
expresses doubts about the company’s ability to remain in business. The auditor’s opinion is
important to investors who rely on independent views of a company’s books and records when
making their decisions to invest in or continue to hold their investment in a company,
including investing in or holding securities sold or issued by a company, fund or entity such as
RE Loans.
62. The important role of the independent auditor and its audit opinion, and the
achievement of the salutary goals of integrity and transparency respecting financial statements
is dependent, in part, on compliance with well documented and universally respected
accounting standards and principles. Among them, GAAP are those principles recognized by
the accounting profession and the SEC as the uniform rules, conventions, and procedures
necessary to define accepted accounting practices at a particular time. RE Loans was required
to prepare its financial statement in accordance with GAAP.
63. GAAP includes not only broad guidelines of general application, but also
detailed practices and procedures. GAAP principles are the official standards accepted by the
SEC and promulgated in part by the American Institute of Certified Public Accountants
(“AICPA”). SEC Regulation S-X (17 C.F.R. § 210.4-01(a)(1)) states that financial statements
filed with the SEC that are not prepared in compliance with GAAP are presumed to be
misleading or inaccurate, despite footnote or other disclosures. SEC Regulation S-X requires
that interim financial statements must also comply with GAAP, with the exception that interim
financial statements need not include disclosures that would be duplicative of disclosures
accompanying the most recent annual financial statements. 17 C.F.R. § 210.10-01(a)(5). SEC
registrants are required under SEC rules to maintain sufficient systems of internal controls to
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ensure fair reporting in conformity with GAAP.
64. GAAP requires that useful information be provided to present and potential
investors, creditors and other users. (FASCON No. 1, Objectives of Financial Reporting by
Business Enterprises (“FASCON 1”), ¶34). Further, the information should be
comprehensible to those who have a reasonable understanding of business and economic
activities and are willing to study the information with reasonable diligence. (FASCON 1,
¶34). FASCON 1 also provides that financial statements should include information about the
company’s economic resources, its obligations and the events that would change any of those
resources or any claims to those resources. (FASCON 1, ¶40). Indeed, the two primary
qualities or characteristics that make accounting information useful for decision-making are
relevance and reliability. (FASCON 2, ¶¶ 15, 33)
65. Under GAAP, to be relevant, “…accounting information must be capable of
making a difference in a decision by helping users to form predictions about the outcomes of
past, present, and future events or to confirm or correct expectations.” (FASCON 2, ¶ 47)
FASCON 2 further notes that an ancillary aspect of relevance is timeliness; i.e., the concept of
having information available to decision makers before it loses its capacity to influence
decisions. (FASCON 2, ¶ 56)
66. Reliable information must have representational faithfulness, and it must be
verifiable and neutral. (FASCON 2, ¶¶ 33,59, 62) Reliability is “[t]he quality of information
that assures that information is reasonably free from error and bias and faithfully represents
what it purports to represent.” (FASCON 2, Glossary of Terms)
67. FASCON 2, ¶79 also states that another fundamental principle —
“completeness” — requires that nothing material is left out of the information that may be
necessary to ensure that the financial statements validly represent underlying events and
conditions.
68. The GAAP principles and standards promulgated in part by AICPA, exist and
are required to be complied with in order to achieve honesty, reliability, accuracy integrity and
transparency with respect to a company’s reported financial results. Armanino was well-
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aware of GAAP and its salutary principles and goals, and the fact that any imprimatur placed
by an auditing firm on the reported financial results that they have been prepared and are
reported in compliance with GAAP is a powerful representation that is relied upon by
investors and that is known to induce their reliance. It was absolutely incumbent on Armanino
to conduct a truly independent audit and speak truthfully when providing an “audit opinion,”
lest it deceive and harm RE Loans’ Members.
2. GAAS — Generally Accepted Auditing Standards
69. In order to obtain a reliable independent opinion on whether a company’s
financial statements fairly present, in all material respects, the financial position of the
company in conformity with GAAP, audits must be conducted in accordance with GAAS,
which are codified in Statements of Auditing Standards (“SAS”) that are referred to with an
“AU” number. In performing its audit work for RE Loans, Armanino agreed and had a duty to
perform its work in conformity with GAAS.
70. As acknowledged in Armanino’s audit opinions, and as set forth in AU 110.02,
the firm had the affirmative duty under GAAS to plan and perform its audits to obtain
reasonable assurance that RE Loans’ financial statements were free of material misstatement,
whether caused by error or fraud.
71. An independent auditor must perform the procedures called for by GAAS.
Then, after performing these procedures, the auditor must decide if anything came to the
auditor’s attention that would lead the auditor to believe that the financial statements are not
fairly presented in accordance with GAAP. AU 150.02 (Standards of Fieldwork). Thus, the
audit process requires professional skepticism to be employed throughout the audit.
AU 333.02, AU 230.07, AU 230.09. The audit opinion is valuable precisely because the
auditor is supposedly conducting an independent and skeptical examination of the information
provided by management.
72. Under GAAS, the auditor must consider both audit risk and materiality in (a)
planning the audit and designing audit procedures, and (b) in evaluating the results of the audit
in relation to the financial statements as a whole. AU 312.11. The auditor must plan the audit
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to obtain reasonable assurance of detecting material misstatements that the auditor believes
could be large enough, individually or in the aggregate, to be quantitatively material to the
financial statements. AU 312.18.
73. The audit must be performed by persons who are adequately trained and
proficient as auditors and who must maintain an “independence” in mental attitude at all
times. Field work must be adequately planned, properly supervised, and with a sufficient
understanding of the clients’ internal controls so that necessary or required audit testing can be
prepared. Importantly, the auditor must secure, through inspection, observation, inquiry and
confirmation, competent evidential matter sufficient to afford a reasonable basis for an opinion
regarding the financial statements under audit.
74. AICPA specifically requires an audit team to be knowledgeable about its
client’s industry, business and operations, as well as for such knowledge to be adequately
considered in the planning phase of an audit. (AU 311.03).
75. Importantly, AU 311 states that the auditor should consider “matters affecting
the industry in which the entity operates, such as economic conditions [or] government
regulations … as they relate to his audit,” as well as “[o]ther matters, such as accounting
practices common to the industry, competitive conditions, and, if available, financial trends
and ratios.” (AU 311.07).
76. AU 312, entitled "Audit Risk and Materiality in Conducting an Audit," provides
guidance on the auditor's consideration of audit risk and materiality when performing an audit
of financial statements in accordance with GAAS. Audit risk is defined as the risk that the
auditor may unknowingly fail to appropriately modify his or her opinion on financial
statements that are materially misstated. (AU 312.02).
77. AU 312 also provides that “[f]inancial statements are materially misstated when
they contain misstatements whose effect, individually or in the aggregate, is important enough
to cause them not to be presented fairly, in all material respects, in conformity with generally
accepted accounting principles.” (AU 312.04) As AU 312 asserts, “[m]istatements can result
from errors or fraud.” (AU 312.04).
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78. AU 316, entitled "Consideration of Fraud in a Financial Statement Audit,"
reiterates and expands upon AU 110, Responsibilities and Functions of the Independent
Auditor (“AU 110”) in the following manner:
The auditor has a responsibility to plan and
perform the audit to obtain reasonable assurance
about whether the financial statements are free of
material misstatement, whether caused by error or
fraud.
(AU 316.01; AU 110.02).
79. AU 316 requires the auditor to specifically assess the risk of material
misstatement of the financial statements due to fraud and consider that assessment in its audit.
(AU 316.45). The requirement to exercise professional skepticism is also reiterated by AU
316 in the context of its importance to the auditor’s consideration of the risk of material
misstatement due to fraud. Colloquially, fraud risk factors are often referred to as “red flags.”
80. Ultimately, AU 316 provides that the presence of red-flags merits an “overall
response” by the auditor, described by AU 316 as “[a] response that has an overall effect on
how the audit is conducted—that is, a response involving more general considerations apart
from the specific procedures otherwise planned,” amongst others. (AU 316.48).
Considerations would include, but are not limited to, exercising heightened professional
skepticism and having a heightened focus on the entity’s selection and application of
accounting principles and policies. Examples of the application of professional skepticism in
response to the auditor’s assessment of the risk of material misstatement due to fraud include
increased sensitivity related to the nature and extent of audit documentation obtained, and
increased recognition of the need to corroborate management’s representations. (AU 316.46).
81. The audit report must state whether the financial statements are presented in
accordance with GAAP. (AU 410) The report is required to identify those circumstances in
which such principles have not been consistently observed in the current period in relation to
the preceding period. The report shall either contain an expression of opinion regarding the
financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be
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expressed. When an overall opinion cannot be expressed, the reasons therefore should be
stated.
82. There are multiple reasons that would require an independent auditor to refrain
from issuing an unqualified or "clean" opinion. AU 508 states, in relevant part:
Certain circumstances may require a qualified opinion. A qualified opinion states that, except for the effects of the matter to which the qualification relates, the financial statements present fairly, in all material respects, financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Such an opinion is expressed when— a. There is a lack of sufficient competent evidential matter or there are restrictions on the scope of the audit that have led the auditor to conclude that he or she cannot express an unqualified opinion and he or she has concluded not to disclaim an opinion…
b. The auditor believes, on the basis of his or her audit, that the financial statements contain a departure from generally accepted accounting principles, the effect of which is material, and he or she has concluded not to express an adverse opinion.
(AU 508.20) AU 508 also states: An adverse opinion states that the financial statements do not present fairly the financial position or the results of operations or cash flows in conformity with generally accepted accounting principles. Such an opinion is expressed when, in the auditor's judgment, the financial statements taken as a whole are not presented fairly in conformity with generally accepted accounting principles.
(AU 508.58).
G. Armanino Issues False and Deceptive “Clean” Audits and Financial
Statements
83. For fiscal years 2006 and 2007, and willfully ignoring numerous “red flags” and
the related risk factors they unveiled, Armanino provided and issued clean audit opinions for
RE Loans on March 16, 2007, and April 11, 2008, respectively, which represented that:
Armanino had conducted its audits in accordance GAAS; and
RE Loans’ financial statements fairly presented, in all material respects, its financial position for fiscal years 2006, and 2007, in conformity with GAAP.
84. These clean audit reports issued by Armanino were essential to RE Loans’
ability to continue raising money through its unregistered securities offerings to Plaintiffs and
other investors in the proposed Class and, importantly, to reassure existing investors that RE
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Loans was in sound financial condition and operating in conformance with the law.
85. In conducting its audits, Armanino had unique access to the underlying
information used to prepare RE Loans’ financial statements. This information was not
available to the public. Armanino knew that a central purpose of its audits was to have the
firm act as a reputational intermediary who would use its unique access to inside information
to provide independent assurances of financial stability to RE Loans investors.
86. RE Loans’ financial statement for 2006, bearing the imprimatur of Armanino’s
false and deceptive unqualified audit opinion of March 16, 2007, was incorporated in its
Exchange Offering circular and related offering materials in November 2007. Its “clean” audit
opinion was used to induce Members to unwittingly vote to approve the Exchange
Transaction, thereby relinquishing their equity memberships in exchange for promissory notes
– and later reinforced by its audit opinion of April 11, 2008 respecting RE Loans’ consolidated
financial statements and footnotes for the 2007 calendar year.
87. RE Loans’ issued financial statements (including the related footnote
disclosures thereto) as of and for the years ended December 31, 2006 and 2007 violated
GAAP. Armanino did not disclose these violations, willfully electing instead to falsely
represent in its "clean" or "unqualified" audit opinion that RE Loans financial statements were
presented in accordance with GAAP. Indeed, RE Loans violated the fundamental principles
of financial reporting, discussed above, by failing to provide: (a) useful information to present
and potential investors and creditors, (b) comprehensible information to those with a
reasonable understanding of business and economic activities, (c) reliable information (i.e.,
information that faithfully represented what it purported to represent), and (d) complete
information.
88. Armanino foresaw, knew and intended at all times material that investors would
rely on its audits and that RE Loans would use them to induce investments and comfort
existing investors to their ultimate detriment. Its flagrant violation of, and egregious departure
from, auditing standards, while ignoring substantial red flags and fraud by its client that was
willful, intentional and reckless, substantially aided and abetted wholesale breaches of
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fiduciary duties owed by RE Loans and its management to Plaintiffs and Class Members and
was itself – by virtue of its false and deceptive clean audit opinions and reported financial
statements — fraudulent.
89. By giving unqualified audit opinions for RE Loans’ financial statements for
fiscal years 2006 and 2007, Armanino represented that its audits of RE Loans’ books and
records were done in accordance with GAAP and GAAS. They were not, and Armanino’s
audit reports were materially misleading and falsely reported RE Loans’ financial condition to
the Company’s investors.
H. Armanino’s Clean Audit Opinions Caused Unsuspecting Class Members Great Harm
90. As a direct consequence of Armanino’s false and deceptive audit opinions and
flagrant violations of GAAS, Members elected to hold and continue to maintain their
investments in RE Loans securities rather than divest. Its March 16, 2007 clean audit opinion
was also a substantial factor in causing members to agree to exchange their equity
memberships in RE Loans for less valuable promissory notes, which they continued to hold
thereafter amid yet another fraudulent and deceptive audit opinion rendered by Armanino on
April 11, 2008. Eventually, RE Loans defaulted on the Wells Fargo line of credit loan and
ultimately defaulted on the promissory notes it had issued to the Members as part of the
exchange transaction. RE Loans, MF 08, Barney Ng, Kelly Ng, Bruce Horwitz, Walter Ng
and B-4 Partners later became engaged in bankruptcy proceedings in California and Texas.
91. The financial harms suffered by Plaintiffs and the Class as defined herein are
tragic. The Managers targeted individuals who were retired or approaching retirement. As a
result of Defendant’s unlawful conduct, many of the RE Loans Members have lost their
retirement funds and life savings and many of them are now destitute.
APPLICATION OF THE DISCOVERY RULE AND
THE FRAUDULENT CONCEALMENT DOCTRINE
92. Plaintiffs did not and could not reasonably have discovered the tortuous and
fraudulent misconduct of Armanino in rendering false and deceptive “clean” audit opinions
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and their violations of GAAS, as more fully discussed herein, prior to April 10, 2010 at the
earliest. In addition, Plaintiffs could not reasonably discover that, given the general market
conditions, they had been injured by or have claims arising from the false financial statements
and audit reports issued by RE Loans and Armanino.
93. The RE Loans Managers continued to actively solicit investment capital for RE
Loans, using Walter Ng Investors and MF08 as intermediary conduits, despite being told in
March of 2007 that RE Loans could no longer raise investor capital. The Managers continued
to solicit investor funds throughout 2008 through false assurances of financial stability
contained in a constant stream oral and written communications to RE Loans and MF08
investors and prospective investors. Investor capital continued to flow into RE Loans through
MF08 well into 2009 because the investors had no inkling of the securities violations, of the
financial insolvency of RE Loans, or of the Ponzi scheme that RE Loans and MF08 had
become. Nor did they have any reason to suspect wrongdoing by anyone had caused them
injury, as opposed to general market conditions. To the contrary, MF08 itself was formed as
an illegal funding source to give RE Loans the false appearance of financial solvency.
94. Furthermore, the Managers owing the investors fiduciary duties of truthfulness
and full disclosure continued instead to feed them false assurances through a series of investor
reports designed to prevent them from suspecting any wrongdoing by the Managers, or the
other participants and enablers of the fraudulent scheme, including Armanino. Upon
information and belief, many of these reports were reviewed by Armanino. This stream of
knowingly false comfort reports, falsely attributing the liquidity problems and defaults of RE
Loans and MF08 solely to general market conditions, continued well into 2010.
95. Plaintiffs and the Class aver that, based on the false and misleading information
fed to them, and the material information concealed from them by the Managers, Armanino
and the other participants in the alleged fraudulent scheme, under California’s discovery rule
they did not discover and did not have reason to discover their causes of action relating to the
scheme involving RE Loans, the Exchange Transaction and the creation of MF08 before April
10, 2010, at the earliest. Prior to that date Plaintiffs and the other investors did not have a
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reasonable factual basis to suspect that they had been harmed through any breach of fiduciary
duty, fraud, negligent misrepresentation or violations of California’s securities laws – as
amply illustrated by the SEC’s failure to ascertain any such misconduct in January 2010.
96. Alternatively, under California’s fraudulent concealment doctrine, the
limitations period was likewise tolled at least through April 10, 2010, based on the active
deceptive conduct of the Mangers, Armanino and the other scheme participants in concealing
Plaintiffs’ causes of action for breach of fiduciary duty, negligent misrepresentation, fraud and
violations of California’s securities statutes – a deception sufficient to conceal the ongoing
securities violations even from the SEC in January 2010. Indeed, the SEC did not commence
its own enforcement action against certain of the Managers until February 28, 2013.
97. In addition, Armanino executed a tolling agreement on December 30, 2011,
which was subsequently amended, as a consequence of which the statute of limitations was
further tolled from December 30, 2011 through and including March 31, 2013.
CLASS ALLEGATIONS
98. Plaintiffs bring this action on behalf of the following individuals (the “Class”):
All persons who, within the applicable statute of limitations (a) purchased a
membership interest in R.E. Loans, LLC or (b) received a promissory note(s) from R.E. Loans on or after November 1, 2007, that have not been fully repaid their principal investment.
99. Excluded from the Class are: (a) the Managers, Armanino, Greenberg Traurig
and Wells Fargo, and (b) members of their families, their estates, any entity in which they
have a controlling interest or which is a parent, subsidiary or affiliate of or is or was controlled
by RE Loans, MF 08, Walter Ng Investments, Bar-K, B-4 Partners, The Mortgage Fund and
their officers, directors, managers, employees, affiliates, agents, legal representatives, heirs,
predecessors, successors, and assigns.
100. Membership in the Class is so numerous that joinder of all members is
impracticable. The disposition of their claims in a class action will provide substantial benefits
to the parties, Class members, and the Court. Although the number of Class Members and
their names are presently unknown, this information can be readily determined from the
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records of RE Loans. Upon information and belief, the Class includes thousands of investors,
most of whom are California citizens.
101. There is a well-defined community of interest in the questions of law and fact
involved in this case. Questions of law and fact common to the members of the Class that
predominate over questions that may affect only individual members of the Class include:
• whether Armanino’s audit opinions and RE Loans’ stated financial
results were false and misleading and/or violated GAAS and/or GAAP;
• whether RE Loans’ sales or offering of investment interest violated state
or federal securities law and regulation;
• whether Armanino aided and abetted others in breaching their fiduciary
duties owed to the Class;
• whether Armanino made false misrepresentations and/or omitted to
disclose material information to the Class and/or aided and abetted
others, and whether the Class sustained injury by reason of Armanino’s
actions, misrepresentations and omissions;
• whether Armanino is jointly and severally liable for the actions,
misrepresentations and omissions of RE Loans;
• whether the Class is entitled to equitable relief; and
• whether the Class is entitled to recover damages and, if so, the amount of
damages that members of the Class are entitled to recover.
102. Plaintiffs’ claims are typical of the Class members’ claims, and are based on
and arise out of uniform misrepresentations, omissions and breaches as described above. If
litigated individually, the claims of each Class member would require proof of the same
material and substantive facts, rely upon the same remedial theories, and seek the same relief.
Then, once Armanino’s liability is established, the Court and a jury can determine the claims
of each member of the Class on the uniform basis of the value and date of their investments.
There will also be no difficulty in the management of this litigation as a class action.
103. Plaintiffs have retained counsel competent and experienced in class action,
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securities fraud, and claims against audit and accounting firms. Plaintiffs have no interests
antagonistic to or in conflict with those of the Class, will fairly and adequately protect the
interests of the Class members and is committed to the vigorous prosecution of this action.
104. A class action is superior to other available methods for the fair and efficient
adjudication of this controversy since joinder of all members of the Class is impracticable.
Proceeding as a class action will permit an orderly and expeditious administration of the
claims of the Class, will foster economies of time, effort and expense and will ensure
uniformity of decisions.
FIRST CAUSE OF ACTION
AIDING AND ABETTING BREACH OF FIDUCIARY DUTY
105. Plaintiffs hereby incorporate by reference each of the preceding paragraphs as
though fully set forth herein.
106. At all times relevant hereto, B-4 Partners, Bar-K, Walter Ng, Bruce Horwitz,
Barney Ng and Kelly Ng acted and failed to act as Managers of RE Loans. In their capacity as
the RE Loan’s Managers, they owed certain fiduciary obligations to Plaintiffs and the Class,
including but not limited to those duties prescribed under the RE Loans’ Operating Agreement
and the several published Offering Circulars under which Plaintiffs and the Class purchased
their membership units.
107. The Managers also owed Plaintiffs and the Class the following fiduciary
obligations under Cal. Civ. Code § 17153 and by its reference § 16404(a):
a. the duty of undivided loyalty and the duty to refrain from engaging in
unfair transactions with Members;
b. the duty to fully disclose all material facts germane to the fiduciary
relationship;
c. the duty to refrain from acting on behalf of any party having an interest
adverse to the Members interests; and/or
d. the duty to act in the highest good faith to the Members and to refrain
from obtaining or accepting any advantage over them in the Company’s
affairs by the slightest misrepresentation or concealment.
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108. Additionally, Plaintiffs and the Class reposed trust and confidence in the
Managers to handle their investments. And in turn, the Managers accepted that trust and
confidence, thereby creating a fiduciary relationship.
109. The Managers breached their fiduciary obligations to Plaintiffs and the Class
and caused damages to Plaintiffs and the Class in an amount to be proven at trial through their
specific actions and inaction.
110. Armanino acted with complicity and knowledge of those breaches.
111. Armanino aided and abetted, encouraged, and rendered substantial assistance to
B-4 Partners, Bar-K, Walter Ng, Bruce Horwitz, Barney Ng and Kelly Ng in breaching their
fiduciary duties to Plaintiffs and the Class.
112. Armanino foresaw, realized and intended that its conduct would substantially
assist the accomplishment of the wrongful conduct and scheme alleged herein.
113. As a result of the substantial assistance of Armanino, Plaintiffs and the Class
have suffered and continue to suffer monetary losses, all in an amount to be determined
according to proof at trial.
114. Armanino’s individual and collective acts and omissions were substantial
contributing factors and causes of violations of the duties as set forth in this Count and to
Plaintiffs and the Class’ indivisible harm and damages, rendering Armanino jointly and
severally liable to Plaintiffs and the Class.
SECOND CAUSE OF ACTION
SECONDARY LIABILITY FOR SECURITIES FRAUD
115. Plaintiffs hereby incorporate by reference each of the preceding paragraphs as
though fully set forth herein.
116. The RE Loans investment units sold to Plaintiffs and the Class, as described
under the several published Offering Circulars conveying membership interests, were
securities under Cal. Corp. Code § 25019.
117. The November 1, 2007 exchange of Plaintiffs’ and the Class members’
membership interest securities for promissory notes created a debt interest security, which is
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itself a security under Cal. Corp. Code § 25019.
118. RE Loans’ securities were sold in, within or from California. In connection
with the offer and sale of securities, RE Loans directly and indirectly made untrue statements
of material fact and omitted to state material facts necessary to make the statements made, in
light of the circumstances under which they were made, not misleading, in violation of under
Cal. Corp. Code § 25401, including but not limited to and specifically including Armanino’s
false and deceptive “clean” audit opinions placing Armanino’s imprimatur on the fraudulent
RE Loans’ financial statements that were also incorporated by or form part of the Exchange
Offering circular and materials.
119. Armanino knowingly and substantially assisted the securities law violations by
RE Loans and the Managers in the manner and for the reasons set forth supra. Armanino’s
misrepresentations materially assisted in the securities fraud and were a substantial factor in
causing harm and damage to Plaintiffs and the Class.
120. Accordingly, pursuant to Cal. Corp. Code § 25504.1, Armanino is jointly and
severally liable to Plaintiffs and the Class for recessionary damages, monetary restitution and
pre- and post-judgment interest at the legal rate, costs, and any additional relief as this Court
may deem appropriate under the circumstances.
THIRD CAUSE OF ACTION
FRAUD BY MISREPRESENTATION
121. Plaintiffs incorporate by reference each of the preceding paragraphs as though
fully set forth herein. Armanino made material misrepresentations to Plaintiffs and the Class
as alleged supra.
122. As described supra, Armanino knew that these statements to Plaintiffs and the
Class were false.
123. Armanino made these statements with the intent to defraud Plaintiffs and the
Class as set forth supra.
124. Armanino’s misrepresentations were conveyed through uniform writings mailed
to each Member, including Plaintiffs and the Class, as set forth supra.
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125. Plaintiffs and the Class believed the representations made by Armanino were
true or were ignorant of their falsity.
126. In direct reliance on Armanino’s misrepresentations, Plaintiffs and Class
members were induced to, and did invest in RE Loans, held their investments and accept the
Exchange Offering converting their membership holdings into virtually worthless debt
security holdings, much to their substantial detriment and loss. Had Plaintiffs or the Class
known the true facts, they would not have taken such action.
127. Plaintiffs and the Class’ reliance upon Armanino’s representations were
reasonable and justified.
128. As a proximate result, Plaintiffs and the Class have been injured by Armanino’s
fraudulent actions.
129. According to Cal. Civil Code § 1709, Armanino is liable for Plaintiffs and the
Class members’ damages.
130. The actions of Armanino as alleged herein, constitute oppression, fraud, or
malice, as those terms are defined in California Civil Code § 3294, entitling Plaintiffs and the
Class, and each of them, to an award of punitive damages.
FOURTH CAUSE OF ACTION
FRAUD BY CONCEALMENT & SUPPRESSION OF FACTS
131. Plaintiffs incorporates by reference each of the preceding paragraphs as though
fully set forth herein.
132. Armanino concealed and suppressed material facts from the Members.
Armanino had a duty to disclose these facts because it undertook a duty to conduct an
independent audit of RE Loans financial statements and (2) it communicated information it
foresaw, knew and intended would be disseminated to RE Loans investors such as Plaintiffs
and the Class that was misleading in light of the facts concealed and suppressed.
133. Armanino concealed and suppressed facts from the Members as set forth supra.
134. As described supra, Armanino knew that these concealed and suppressed facts
were necessary to make material statements made not misleading.
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135. Armanino made misrepresentations and concealed and suppressed facts with the
intent to defraud Members as set forth supra.
136. Armanino withheld the concealed and suppressed these facts from uniform
writings disseminated to each Member, including Plaintiffs and the Class.
137. Plaintiffs and the Class believed that the representations made were true or were
ignorant of their falsity or misleading nature.
138. In reliance Armanino’s misrepresentations, which concealed and suppressed
material facts, Plaintiffs and the Class were induced to, and did invest in RE Loans and
participate in and accept the Exchange Agreement.
139. If Plaintiffs and the Class had known the actual facts, they would not have made
their investments, exchanged their ownership interests for promissory notes, or taken other
actions injurious to their interests.
140. Plaintiffs’ and the Class’ reliance upon these representations, which concealed
and suppressed material facts, was reasonable and justified.
141. As a proximate result, Plaintiffs and the Class have been injured by the
Armanino’s fraudulent actions.
142. According to Cal. Civil Code § 1709, Armanino is liable for Plaintiffs’ and the
Class’ damages.
143. The actions of Armanino as alleged herein, constitute oppression, fraud, or
malice, as those terms are defined in California Civil Code § 3294, entitling Plaintiffs and the
Class, and each of them, to an award of punitive damages.
FIFTH CAUSE OF ACTION
NEGLIGENT MISREPRESENTATION
144. Plaintiffs incorporate by reference each of the preceding paragraphs as though
fully set forth herein.
145. As alleged supra, Armanino prepared audit reports and RE Loans financial
statements that made multiple assertions of past or existing material facts that were false and
for which Armanino had no reasonable grounds for believing to be true.
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146. Armanino intended that its misrepresentations as alleged herein respecting the
financial statements it prepared would induce the reliance of Plaintiffs and Class Members.
147. Moreover, aside from its intent to induce Plaintiffs’ and the Class’ reliance,
Armanino had access to extensive non-public information from RE Loans that disconfirmed
the misrepresentations contained in the communications it prepared, and Armanino therefore
played more than a “secondary role” in preparing those communications, as alleged supra.
148. In reliance on these misrepresentations, Plaintiffs and the Class were induced to,
and did invest in RE Loans and/or participate in and accept the Exchange Agreement.
Plaintiffs and Class Members would not have taken such action as holders had they known the
truth.
149. Under the circumstances as alleged supra, Plaintiffs and the Class’ reliance on
Armanino’s representations was reasonable and justified.
150. As a proximate result, Plaintiffs and the Class have been injured by Armanino’s
negligent misrepresentation.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs, individually and on behalf of the Class, pray for an order
and judgment against Armanino as follows:
A. certifying the Class as set forth in this Complaint, and appointing Plaintiffs as
Class Representatives for the Class;
B. awarding Plaintiffs and the Class rescission;
C. awarding Plaintiffs and the Class restitution with interest at the legal rate;
D. awarding Plaintiffs and the Class monetary damages and interest at the legal
rate;
E. awarding Plaintiffs and the Class the costs and disbursements of this action,
including reasonable counsel fees, costs and expenses in amounts to be determined by the
Court;
F. awarding pre- and post-judgment interest; and
G. granting such other and further relief as is just and proper.
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REQUEST FOR JURY TRIAL
Plaintiffs hereby request a trial by jury on all issues triable by jury.
DATED: June 18, 2013
CHAVEZ & GERTLER LLP
BONNETT, FAIRBOURN, FRIEDMAN
& BALINT, P.C.
MARK A. CHAVEZ
Attorneys for Plaintiffs
Additional Counsel:
BONNETT, FAIRBOURN, FRIEDMAN
& BALINT, P.C.
ANDREW S. FRIEDMAN (Pro Hac Vice pending)
WENDY J. HARRISON (Bar No. 151090)
2325 E. Camelback Road, Suite 300
Phoenix, AZ 85016
Telephone: (602) 274-1100
Facsimile: (602) 274-1199
AIMAN-SMITH & MARCY
RANDALL AIMAN-SMITH
CAREY JAMES
7677 Oakport Street, Suite 1020
Oakland, CA 04621
Telephone: (510) 562-6800
BARRACK, RODOS & BACINE
STEPHEN R. BASSER
600 West Broadway, Suite 900
San Diego, CA 92101
Telephone: (619) 230-0800
LAW OFFICE OF RICHARD E. BROWN
RICHARD E. BROWN
P.O. Box 1420
Alamo, CA 94507-1420
Telephone: (925) 295-0700
Attorneys for Plaintiffs